How to use land equity as a down payment to build a house

Written by duncan jenkins
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How to use land equity as a down payment to build a house
Construction loans will finance new construction on your home using land as collateral. (Hard working construction worker at a construction scene. image by Andy Dean from

Building a home can be a enriching and rewarding experience. However, figuring out the financial logistics must be your first priority. If you already own the land on which you will build your future home, you must determine how to finance the construction using the land as your collateral. The easiest way to do this is to obtain a construction loan.

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Things you need

  • Original deed to the land in question
  • Contractor estimates for building materials, budget and time frame
  • Income documents (W2s, pay stubs)

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  1. 1

    Collect all estimates on building supplies, labour costs and subcontractor fees for masonry, plumbing and electric work. These documents are essential before you approach a lender for a construction loan. Some contractors offer free estimates, but in order to get a comprehensive picture of the costs, you may need to pay for this service.

  2. 2

    Obtain an appraisal on the land you own. You'll need to pay for a professional appraiser to come out, inspect the land, its viability for construction and review comparable land parcels in the area. The value of your land must be sufficient to subsidise your construction loan.

  3. 3

    Decide what type of construction loan you wish to acquire. The most popular variety is the temporary-to-permanent. This loan begins as a revolving line of credit that you can use to take advances for building supplies, labour and decorative items. Once the house becomes inhabitable, the loan switches to a permanent, closed-end mortgage.

  4. 4

    Research lenders in your area. If you have solid credit (a FICO score above 680, see www.AnnualCreditReport for a free copy of your credit report) you should focus your search to banks and credit unions. Make sure all prospective lenders have the type of loan program you desire.

  5. 5

    Apply at two or three lenders. Provide all loan officers with contractor estimates, the appraisal on your land and your income documents. This will help increase the speed with which your loan is preapproved. Choose the loan option that best meets your financial limitations and construction goals.

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